The most important aspect of our end product – Mortgage Securitization Audit and Analysis report is the analysis (and commentaries) portion of our comprehensive written report. CSA is able to “connect all the dots” providing the homeowner with accurate, specific and clear issues and evidence for and his/ her legal counsel’s reference and use to build a superior foreclosure defense and offense in favor of the homeowner.
- Proprietary Process for Mortgage Securitization Audits
- Proprietary Review and Written Analysis Report of the Audit Results, including research and commentaries on the following documents:
- Promissory Note
- Deed of Trust
- UCC Assignment
- Standing -REMIC
- REMIC Mortgage-Backed Securities Pools
- Mortgage Loan Purchase Agreement (MLPA)
- Purchase and Assumption Agreement (Lenders in receivership)
- Pooling & Servicing Agreement (PSA, Ex-4)
- IRS Publication 938
- Investment Prospectus & Supplemental Prospectus – Form 424(b)
- MBS Trust S-3 Registration Statement
- Published Articles & Court Cases Regarding Mortgage Securitization, which are relevant to the client’s specific situation
- Expert Witness Testimony and Court Presentation
- Information & Litigation Support Services for Attorney’s on Mortgage
- Securitization Defense
- Research and Review of Court Pleadings and Cases (with homeowner’s legal counsel)
- Review of Points and Authorities (with homeowner’s legal counsel)
The Whole Picture in a Mortgage Securitization Transaction
CSA put together the following flow charts to visually frame the whole picture relating to required legal processes associated with mortgage securitization.
Mortgage securitization is a financial transaction whereby hundreds of mortgage loans are pooled together and converted into securities. The loans are collected and packaged by a securitization “Sponsor” and sold to a “Depositor” who in turn sells and transfers these loans into a tax-advantaged trust entity, which is a special purpose vehicle (SPV) that holds the mortgage loans as collateral on the securities traded and sold by Wall Street and other firms to investors. The securitized mortgages held in the mortgage-backed securities (MBS) trust entity are rated and classified in “tranches” (with each tranche representing a different level of risk & return). The investors (“Certificate Holders”) purchase the rights to cash generated from the borrowers’ (mortgagors’) principal and interest payments of the loans.
Chart 1: Transfer of Mortgage from a Borrower to a Lender;
Contracts – Loan Documents between Borrower and Lender
The securitization process starts when a potential borrower needs a loan. The lender funds the loan in exchange for the borrower’s contractual promise to pay the loan’s principal with interest (promissory note), and granting an interest in certain collateral, including the property purchased with the loan proceeds (Deed of Trust). See Chart 1 above.
Chart 2: Transfer of Mortgages from Lender to Purchaser; Contracts – Mortgage Loan Purchase
Agreement (MLPA) & Interim Service Agreement (ISA) between the Lender and Purchaser
Thereafter (Chart 2 above), the lender sells/transfers pooled mortgages to a “Purchaser,” who may be the securitization “Sponsor,” usually an affiliate company of the lender or an investment bank. The Purchaser may also purchase other loans from other lenders, benefiting from significant economies of scale, with a typical MBS trust composed of thousands of pooled mortgage/loans worth $500 million to more than $1 billion.
Chart 3: Transfer of Mortgages from Purchaser to Depositor;
Contracts – MLPA between the Purchaser and Depositor
The Purchaser (often along with other purchasers) sells loans to the “Depositor”, a bankruptcy-remote entity setup for the purpose of “depositing” loans in a securitization trust(Chart 3 above). The Depositor buys loans from each purchaser under a purchaser-depositor’s MLPA. The Purchaser-Depositor MLPA may or may not assign the rights under the lender-purchaser MLPA.
The lender and/or the Purchaser also provides the Depositor with indemnity for prospectus information and warranting/representing “truthfulness of information,” and the depositor then places such information and indemnities in the prospectus (and prospectus supplement) or other offering documents.
Chart 4: Depositor “depositing” pooled loans/mortgages to an Issuer Trust for loan pool;
Depositor prepares Prospectus (& Supplemental Prospectus); Contracts – Pooling and
Service Agreement (PSA) between the Loan Servicer, Depositor and Trust
After buying the loans from the purchaser(s), the depositor holds the loans (for a “split second”) before depositing the loans into an issuer securitization trust. Using a “shelf registration,” the Depositor has often filed a prospectus describing the securitization practices. Then, for each subsequent securitization, the Depositor files a prospectus supplement describing that specific securitization transaction. These offering documents describe the securitization transaction parties, the classes of bond certificates to be issued, the yield on the various tranches/classes of certificates, the loan pool, the trust administration, and certain legal matters (See Chart 4 above). The MLPA representations and warranties may also be stated in the one or more offering documents. The Pooling and Servicing Agreement (PSA) provides for the transfer of loans to the trust on the specified closing date. The PSA repeats the key MLPA terms or provisions, or set out other terms relevant to the MLPA.
Chart 5: Depositor “depositing” pooled loans/mortgages to an Issuer Trust for loan pool;
Depositor prepares Prospectus (& Supplemental Prospectus);
Contracts – PSA between the Loan Servicer, Depositor and Trust.
The MBS trust created by the Purchaser for the issuer is called a Special Purpose Vehicle (SPV).
The SPV is organized to be a Qualified Special Purpose Entity (QSPE), which receives a favorable “pass-through” or single tax treatment based on strict IRS rules. To avoid the double taxation of the trust and the certificate holders (multiple investors who purchased the bond certificates from the trust), the trust is classified as a Real Estate Mortgage Investment Conduit (REMIC), a category of QSPE. Upon qualification as a REMIC, the income of the trust (scheduled mortgagors’ payments) is taxed only at the Certificate Holders’ (Investors’) level.
The PSA provides for the trust administration through the Trustee and Servicer. The SPV or the trust transfers the right to service the collection of income from the pooled assets to a third party or is most cases to the loan originator/originating lender itself. The Servicer collects borrower obligations on the loans subsequent to the securitization closing date on behalf of the trustee. The rights to service the mortgage loans are called Mortgage Servicing Rights or MSR. The rights to service mortgage assets are also considered as assets with recognized value. The Trustee is the nominal legal owner of the trust assets for the benefit of the investors (Certificate Holders).
Chart 6: Securitization Participants (total picture)
The Securitization Parties and Their Roles(Chart 6)
1. Loan Originator/Originating Lender. The “originator” is the lender that provided the funds to the borrower (mortgagor) at loan closing or close of escrow. Usually the originator is the named “Lender” (mortgagee) in the mortgage Note. Majority of lenders/originators securitize loans because of the numerous advantages and benefits previously mentioned.
2. Warehouse Lender. The Originator probably borrowed the funds on a line of credit from a short-term revolving warehouse credit facility (commonly referred to as a “warehouse lender”); nevertheless the money used to close the loan were technically and legally the Originator’s funds. Warehouse lenders are either “wet” funders or “dry” funders. A wet funder will advance the funds to close the loan upon the receipt of an electronic request from the originator. A dry funder, on the other hand, will not advance funds until it actually receives the original loan documents duly executed by the borrower.
3. Securitizer: Sponsor, Aggregator or Purchaser. The Sponsor is the lender that securitizes the pool of mortgage loans. This means that it was the final aggregator of the loan pool and then sold the loans directly to the Depositor, which it turn sold them to the securitization trust. In order to obtain the desired ratings from the independent ratings agencies such as S&P, Moody’s or Fitch, the Sponsor normally is required to retain some exposure to the future value and performance of the loans in the form of purchases of the most deeply subordinated classes of the securities issued by the Trust, i.e., the classes last in line for distributions and first in line to absorb losses (commonly referred to as the “first loss pieces” of the deal).
4. Depositor. The Depositor exists for the sole purpose of enabling the transaction to have the key elements that make it a securitization in the first place: a “true sale” of the mortgage loans to a “bankruptcy-remote” and “FDIC-remote” purchaser. The Depositor purchases the loans from the Sponsor, sells the loans to the Trustee of the securitization trust, and uses the proceeds received from the trust to pay the Sponsor for the Depositor’s own purchase of the loans. It all happens simultaneously, or as nearly so as theoretically possible. The length of time that the Depositor owns the loans has been described as “one nanosecond.”
The Depositor has no other functions, so it needs no more than a handful of employees and officers. Nevertheless, it is essential for the “true sale” and “bankruptcy-remote”/“FDIC-remote” analysis that the Depositor maintains its own corporate existence separate from the Sponsor and the Trust and observes the formalities of this corporate separateness at all times. The “Elephant in the Room” in all structured financial transactions is the mandatory requirement to create at least two “true sales” of the notes and mortgages between the Originator and the Trustee for the Trust so as to make the assets of the Trust both “bankruptcy” and “FDIC” remote from the originator. And, these “true sales” will be documented by representations and attestations signed by the parties; by attorney opinion letters; by asset purchase and sale agreements; by proof of adequate and reasonably equivalent consideration for each purchase; by “true sale” reports from the three major “ratings agencies” (Standard & Poor’s, Moody’s, and Fitch) and by transfer and delivery receipts for mortgage notes endorsed in blank.
5. Trustee. The Trustee is the nominal owner of the loans on behalf of the Certificate Holders (Investors) at the end of the securitization transaction. Like any trust, the Trustee’s powers, rights, and duties are defined by the terms of the transactional documents that create the trust, and are subject to the terms of the trust laws of some particular state, as specified by the “Governing Law” provisions of the transaction document that created the trust. The vast majority of the residential mortgage backed securitized trusts are subject to the applicable trust laws of Delaware or New York. The “Pooling and Servicing Agreement” (or, in “Owner Trust” transactions as described below, the “Trust Indenture”) is the legal and governing document that creates these common law trusts and the rights and legal authority granted to the Trustee is no greater than the rights and duties specified in this Agreement. The Trustee is paid based on the terms of each structure. For example, the Trustee may be paid out of interest collections at a specified rate based on the outstanding balance of mortgage loans in the securitized pool; the Master Servicer may pay the Trustee out of funds designated for the Master Servicer; the Trustee may receive some on the interest earned on collections invested each month before the investor remittance date; or the Securities Administrator may pay the Trustee out of their fee with no charges assessed against the Trust earnings. Fee amounts range between a low of .0025% to as high as .009%.
6. Indenture Trustee and Owner Trustee. Most private-label securitizations are structured to meet the Internal Revenue Code requirements for tax treatment as a “Real Estate Mortgage Investment Conduit (“REMIC”). However some securitizations (both private-label and Government Sponsored Enterprises or GSEs) have a different, non-REMIC structure usually called an “Owner Trust.” In an Owner Trust structure the Trustee roles are divided between an Owner Trustee and an Indenture Trustee. As the names suggest, the Owner Trustee owns the loans; the Indenture Trustee has the responsibility of making sure that all of the funds received by the Trust are properly disbursed to the investors (bond holders) and all other parties who have a financial interest in the securitized structure. These are usually Delaware statutory trusts, in which case the Owner Trustee must be domiciled in Delaware.
7. Primary Servicer. The Primary Servicer services the loans on behalf of the Trust. Its rights and obligations are defined by a loan servicing contract, usually located in the Pooling and Servicing Agreement in a private-label (non-GSE) deal. The trust may have more than one servicer servicing portions of the total pool, or there may be “Secondary Servicers,” “Default Servicers,” and/or “Sub-Servicers” that service loans in particular categories (e.g., loans in default). Any or all of the Primary, Secondary, or Sub-Servicers may be a division or affiliate of the Sponsor; however under the servicing contract the Servicer is solely responsible to the Trust and the Master Servicer (see next paragraph). The Servicers are the legal entities that do all the day-to-day “heavy lifting” for the Trustee such as sending monthly bills to borrowers, collecting payments, keeping records of payments, liquidating assets for the Trustee, and remitting net payments to the Trustee.
The Servicers are normally paid based on the type of loans in the Trust. For example, a typical annual servicing fee structure may be: .25% annually for a prime mortgage; .375% for an Alt-A or Option ARM; and .5% for a subprime loan. In this example, a subprime loan with an average balance over a given year of $120,000 would generate a servicing fee of $600.00 for that year. The Servicers are normally permitted to retain all “ancillary fees” such as late charges, check by phone fees, and the interest earned from investing all funds on hand in overnight US Treasury certificates (sometimes called “interest earned on the float”).
8. Master Servicer. The Master Servicer is the Trustee’s representative for assuring that the Servicer(s) abide by the terms of the servicing contracts. For trusts with more than one servicer, the Master Servicer has an important administrative role in consolidating the monthly reports and remittances of funds from the individual servicers into a single data package for the Trustee. If a Servicer fails to perform or goes out of business or suffers a major downgrade in its servicer rating, then the Master Servicer must step in, find a replacement and assure that no interruption of essential servicing functions occurs. Like all servicers, the Master Servicer may be a division or affiliate of the Sponsor but is solely responsible to the Trustee. The Master Servicer receives a fee, small compared to the Primary Servicer’s fee, and based on the average balance of all loans in the Trust.
9. Custodian. The Master Document Custodian (MDC) takes and maintains physical possession of the original hard-copy Mortgage Notes, Deeds of Trust, the assignments, sales and purchase agreements and certain other “key loan documents” that the parties deem essential for the enforcement of the mortgage loan in the event of default. The MDC must also execute representations and attestations that all of the transfers really and truly occurred “on time” and in the required “order” and that “true sales” occurred at each link in the chain.
- This is done for safekeeping and also to accomplish the transfer and do the negotiation for the possession of the Notes that is essential under the Uniform Commercial Code for a valid transfer to the Trustee to occur.
- Like the Master Servicer, the Master Document Custodian is responsible by contract solely to the Trustee (e.g., the Master Document Custodial Agreement). However, unlike the Master Servicer, the Master Document Custodian is an institution wholly independent from the Servicer and the Sponsor.
- There are exceptions to this rule in the world of Fannie Mae/Freddie Mac (“GSE”) securitizations. The GSE’s may allow selected large originators with great secure storage capabilities (in other words, large banks) to act as their own Master Document Custodians. But even in those cases, contracts make clear that the GSE Trustee, not the originator, is the nominal owner of the Note and the mortgage loan.
- The Master Document Custodian must review all original documents submitted into its custody for strict compliance with the specifications set forth in the Custodial Agreement, and deliver exception reports to the Trustee and/or Master Servicer as to any required documents that are missing or fail to comply with those specifications.
- In so doing the Custodian must in effect confirm that for each loan in the Trust there is a “complete and unbroken chain of transfers and assignments of the Notes and Mortgages.”
- This does not necessarily require the Custodian to find assignments or endorsements naming the Depositor or the Trustee. The wording in the Master Document Custodial Agreement must be read closely. Defined terms such as “Last Endorsee” may technically allow the Custodian to approve files in which the last endorsement is from the Sponsor in blank, and no assignment to either the Depositor or the Trustee has been recorded in the local land records.
- In many private-label securitizations a single institution fulfills all of the functions related to document custody for the entire pool of loans. In these cases, the institution might be referred to simply as the “Custodian” and the governing document as the “Custodial Agreement.”